The Journal of Social Sciences Research ISSN(E): 2411-9458, ISSN(P): 2413-6670 Vol
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The Journal of Social Sciences Research ISSN(e): 2411-9458, ISSN(p): 2413-6670 Vol. 5, Issue. 2, pp: 264-274, 2019 Academic Research Publishing URL: https://arpgweb.com/journal/journal/7 Group DOI: https://doi.org/10.32861/jssr.52.264.274 Original Research Open Access The Moderating Effect of Shariah Governance on Financial and Maqasid Shariah Performance: Evidence from Islamic Banks in Indonesia Lia Dahlia Iryani* Doctoral Student of Accounting Program Padjadjaran University and Lecturer at the Faculty of Economic, Pakuan University, Jalan Pakuan PO Box 452 Bogor 16143, West Java, Indonesia Winwin Yadiati Lecturer and researcher at Departement of Accounting, Padjadjaran University, Jalan Dipati Ukur 35, Bandung 40132, West Java, Indonesia Eddy Mulyadi Supardi Lecturer at the Faculty of Economic, Pakuan University, Jalan Pakuan PO Box 452 Bogor 16143, West Java Indonesia Iwan Triyuwono Lecturer and researcher at the Faculty of Economic and Business, University of Brawijaya, Jalan Mayjend Haryono 165, Malang 65145, East Java Indonesia Abstract The aim of this research is to assess the effect of financial performance to Maqasid Shariah performance with shariah governance as a moderating variable. Financial performance can be measured based on three criteria: firm size (FS), return on asset (ROA) and asset structure, while Maqasid Shariah performance is measured by zakat, infaq, shadaqoh and awqaf (ZISWAF) and qordhul hasan (QH). Shariah governance (SG) is measured by the proportion of independent board of commissioners’ members, board size, audit committee, and shariah supervisory board. The data in this study are the secondary data from Islamic Banking Financial Report (IBFR) of 2012-2016. This research employed a quantitative approach with panel data regression using E-views 9.0 software. The method for the data analysis used factor analysis. The results show that the effects of FS and ROA on Maqasid Shariah performance are significant, and the implementation of shariah governance is generally proven to play a significant role in moderating the effect of FS and ROA on Maqasid Shariah performance. The better the implementation of SG, the stronger the predictability of Maqasid Shariah, and shariah governance has a positive effect on Maqasid Shariah. Keywords: Proportion of independent board of commissioners; Board size, audit committee; Shariah Supervisory Board (SSB); Financial performance; ZISW; Qardhul hasan. CC BY: Creative Commons Attribution License 4.0 1. Introduction In the Islamic Financial Service Industry Stability Report 2016, it is stated that Indonesian Islamic banking is currently one of the contributors to the development of global Islamic banking, which was estimated to have total assets of $ 1.9 trillion at the end of 2016, contributing 2.5% of total Islamic financial assets (IFSB, 2016). Indonesia has gained international recognition as follows: (1) together with the UAE, Saudi Arabia, Malaysia and Bahrain, it is now considered to be in a position to offer lessons to other countries in the world for the development of Islamic finance and (2) together with Qatar, UAE, Saudi Arabia, Malaysia and Turkey (QISMUT), Indonesia is considered to be a future Shariah financial driving force (Ernst and Young, 2016). Positive growth marked the development of Shariah banking in 2016, after a slowing of growth in the three previous years. Islamic banking assets in 2016 were recorded to have increased by Rp 412,101 billion, or a growth of 20.28%. Shariah banking contributed the most to the increase in Islamic banking assets, with Rp 356,504 billion (The Financial Services Authority, 2016b;2016a). Islamic banks carry out their business activities based on Shariah principles, which are in accordance with the fatwa of the National Sharia Board (DSN); specifically, must be free from riba (interest), maysir (games of chance or speculation) and gharar (excessive uncertainty) in all their operations. Therefore, the objectives of Islamic banking must also be in accordance with the objectives of Shariah, or Islamic Law (Bank Indonesia, 2013). Measurement of the performance of Islamic banks in accordance with the objectives of Shariah, or Islamic Shariah, is yet to be developed, so any performance measurement of such banks still uses measures which highly focus on financial aspects. Little attention has been paid to non-financial aspects (Ascarya and Sukmana, 2017; Triyuwono, 2011). More specifically, research integrating the value of Islamic principles with measurement of the performance of Islamic banks began to emerge in 2008, in which social aspects should be of concern to Islamic banks (Akram and Furqani, 2013; Chapra and Khan, 2008; Dusuki and Bouheraoua, 2011; Mohammed and Razak, 2008). Islamic banking carries out social functions, the most visible of which are realized through the activities of collecting and *Corresponding Author 264 The Journal of Social Sciences Research distributing zakat, infaq, sadaqah, grants, and waqf (ZISW) (Auda, 2008; Chapra and Khan, 2008; Vejzagic and Smolo, 2011). This background has motivated this research to establish whether the financial performance of Islamic banks influences the performance of Maqasid Shariah, especially as seen in the activity of ZISW. This research is important because the relationship between financial performance and Maqasid Shariah performance is expected to provide information, especially to stakeholders, on the extent financial information can be an indication of continuity of social aspects, in this case ZISW, in the performance of Maqasid Shariah (Hainš and Bockaj, 2018). In addition to testing the influence of financial performance on the performance of Maqasid Shariah, this study also assesses the role of Shariah governance (SG) in moderating the relationship between financial performance and Islamic Maqasid. The Shariah governance structure assessed in this study is regulated by Bank Indonesia Regulation No.11/33/2009 on the implementation of GCG for Islamic commercial banks, including the proportion of independent commissioners, the number of meetings held by the board of commissioners, the size of the audit committee, the number of meetings held by the audit committee, and the size and educational background of the Shariah Supervisory Board. Therefore, this study is expected to comprehensively describe the role of SG. On the other hand, the motivation to conduct this research is also to measure the performance of Islamic banks, which integrate the value of Maqasid Shariah, so that the social aspects, in this case ZISW and Qordhul Hasan, become the main concerns. Essentially, Islamic banks should be more concerned with social welfare goals than their commercial goals (Dusuki, 2007). 2. Literature Review and Hypothesis Development 2.1. Shariah Governance In Islamic banks, the aim of SG is specifically to ensure fairness to all stakeholders (Choudhury and Nurul, 2013). This is achieved through good transparency and accountability (Grassa, 2013). In the context of Islamic financial institutions, SG should include: (1) organizational arrangements in which the manager's actions are in line with the interests of stakeholders; (2) organ governance (which includes the Board of Directors, the Shariah Supervisory Board, and management) should have the purpose of meeting stakeholder interests and facilitating the process of effective monitoring, so that resource use can be efficient; and (3) obedience to the rules and principles of Islamic law (IFSB, 2016). The SG concept for Islamic banks issued by IFSB views SG as complementary to the existing corporate governance system. In addition to having a board of directors, internal and external audits, and a compliance unit as key elements of the corporate governance system, Islamic banks must have a Shariah board (Shariah Supervisory Board: SSB), internal and external Shariah audits and a Shariah compliance unit as the main elements of the Shariah governance system. In this system, the Shariah Supervisory Board plays an important role in the process of supervising, monitoring, auditing and providing opinions on Shariah compliance to the Islamic financial institutions (Grassa, 2013; Hasan, 2001; Muliadi and Feriyanto, 2018; Yadiat et al., 2017). 2.2. Financial Performance in Relation to Maqasid Shariah Based on the Regulation of Bank Indonesia No. 6/10/PBI/2004 dated 12 April 2004 concerning the Rating System for Commercial Banks, and Bank Indonesia Circular No. 6/23/ DNPB dated May 31, 2004 concerning the Rating System for the Health of Commercial Banks, a number of CAMELS (Capital, Assets Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk) factors were determined (The Financial Services Authority, 2014). According to Syafii (2012), the performance measurement of Islamic banking with this method has many weaknesses. First, by making financial ratios the main determinant of the performance of a company, managers act in the short term and ignore the long term. Second, ignoring non-financial and asset measurement aspects will give a wrong view to company managers in the present and even in the future. Finally, financial performance is only based on past performance, so it cannot help a company to achieve plans in the following period. Thus CAMELS is an instrument that is not in accordance with the values that underlie Islamic banks (Kamran and Zhao, 2016; Triyuwono, 2011). Bedoui H. E. and Mansour (2015), also state that the Islamic view of performance is closely related to ethics; it is not limited